Leaking Hot Water Heaters

Our Asheville office was built in 1892.  I cannot speak for any upgrades made between 1892 and the mid-1980s, but I would like to think there were a few.  When Parsec moved into this building around 1986, almost the entire building had been remodeled.  It was brought up to what was then considered modern standards.

Over the years, we have experienced lots of challenges with our building.  For example, it is always fun to run network cable.  If you have ever renovated an old house, you can appreciate the architecture – and frustration – of buildings that were never designed for the age of technology.

Our latest adventure involves remodeling the top and main floor restrooms.  It was supposed to be a simple job of replacing fixtures, painting, et cetera.  Unfortunately, we discovered that the hot water heaters (inexplicably located in the ceiling) were leaking and needed replacement.  The contractor then uncovered significant water damage in one of the bathrooms, resulting in an almost complete gut of that room.

The project is now over budget due to these unexpected expenses.  As with everything else in life, the best laid plans are often derailed by things you cannot foresee.  The same principle applies to your financial life.

While we can design a careful plan for any financial goal, things happen.  You could encounter a bear market.  Or the stork can bring an unexpected baby late in life.  Or your college graduate child could move home to live with you, thwarting your plans to downsize your home.

The key to success is to be adaptable.  Realize that you will most likely need to periodically adjust your financial plan.  It will not be static.

We are here to help.  We greatly appreciate it when you tell us of life’s unexpected events.  We are a team, working together to help you meet as many of your financial goals as you can.  We encourage you to call us so we can stay on track.

Cristy Freeman, AAMS
Senior Operations Associate

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Print Me a Heart Valve, Stat!

20 years ago, I was a sophomore in college. I had a phone in my dorm room (connected to the wall by a cord) but I did not have a computer. If I needed one, I went to the computer lab on campus. I did not have an email account until my senior year. That same year, I distinctly remember my chemistry professor telling the class about this crazy thing called “the World Wide Web.” Fast forward 20 years and here I sit, with a tiny device that fits in my pocket and is a portal to the collective knowledge of the human race. And if for some reason I can’t get an answer to something in less than 3 seconds, I go ballistic. If you haven’t seen Louis CK’s bit about “Everything’s Amazing and Nobody is Happy,” you have to go to YouTube right now and watch it. I’ll wait.

20 years ago an iPhone would have seemed incredible, yet now they are ubiquitous and more essential to life than oxygen. On the few occasions I’ve left mine behind at home or at the office, I panic like I’m in one of those dreams where you suddenly realize you’re at the grocery store with no clothes on. I mean, it wasn’t that long ago that I routinely traveled around with NO PHONE AT ALL, oblivious to the perils that such a situation engendered.  

So what do these musings of mine have to do with finance? Nothing. But I was reminded of how fast technology moves when someone asked me about 3-D printing the other day. I’ve heard a little about it on NPR, but I’m not too familiar with the technology, so I did a little online research (ah, Google, another thing I can’t live without). In a nutshell, it’s a Star Trek-like technology that pretty much allows you to print an object. As in, one minute there’s nothing, and the next minute BOOM there’s a pen. (I’m sure it takes longer than a minute, but you know what I mean.) Apparently, the technology has been around for about 30 years, but it’s only now becoming inexpensive and accessible to consumers. There are practical applications for something like this in manufacturing, architecture, and medicine, but also in the consumer world. One that sounds totally awesome is the ability to download data from the web that would allow you to build a spare part for something that is no longer manufactured anywhere. In your home! Or, instead of shipping a product to a far-away destination, the data could be sent digitally to a printer that makes the product locally. How cool is that?

Most of the companies at the forefront of this technology are small-caps. Fewer analysts follow small-cap stocks, and research reports are scarce compared to the companies we follow in our coverage universe. This makes it difficult for me to formulate an opinion on the stock of small companies like these (for as you know, just because you like a company and/or its product, it doesn’t necessarily follow that the company’s stock is a good investment). I think 3-D printing is amazing technology and I imagine the applications will be myriad, but at this stage in the game much of the investment landscape is speculative. When buying individual stocks, our focus is on established, shareholder-friendly companies with strong balance sheets, positive fundamentals, attractive valuations, and good prospects for earnings growth and total return.

Sarah DerGarabedian, CFA
Director of Research

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Are They Made from Real Girl Scouts?

I spotted a headline online recently announcing that a new flavor of Girl Scout cookies would have a secret ingredient.  I laughed out loud.  I immediately thought of that line from the “Addams Family” movie, delivered so well by Christina Ricci, “Are they made from real Girl Scouts?”  (Look it up on You Tube.) 

As it turns out, the secret ingredient is not Girl Scouts; it is a vitamin cocktail.  I looked at the ingredient label on their website.  Yes, you get a small dose of vitamins when you eat 3 cookies…along with 8 grams of fat.  Am I supposed to feel better when I eat more than 3 cookies, because the cookies are “good for me?”

We all know that, no matter how nutritious new forms of cookies, potato chips, and burgers may claim to be, they cannot replace a balanced diet that contains fruits and vegetables.  Fad diets come and go.  You might lose a few pounds, only to regain them because who can eat mango smoothies all the time? 

You can apply the same principle to your investments.  Chasing the latest fad in investment strategy can be costly.  It is important to be very thoughtful about your asset allocation.  As we have said many times, it is easy to have an allocation of 100 percent equities in an up market.  It is extremely difficult to stick with that strategy when the market drops 500 points in one day. 

Your investment advisor is here to help you.  If you have not taken a look at your asset allocation in awhile, now is a good time to begin the conversation.  Have your goals changed?  Has your family expanded?  Have you started a new business?  All of these events, as well as many others, can prompt a change.  We are here to help, so put down the Girl Scout cookies and give us a call.

Cristy Freeman, AAMS
Senior Operations Associate

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Keep Calm and Carry On

While reading an article about the Nobel Prize award to two American economists, I spotted a headline to the right.  It featured a link to a story CNN wrote in honor of International Day of the Girl.  Titled “To my 15-Year Old Self:  Things I Wish I’d Known,” the writer posed that question to notable women in a variety of fields.  The link showed a picture of Oprah, because you always have to ask her those sorts of questions.

I find her rather annoying, so, naturally, I clicked the link.  The problem I have with her is she seems out of touch.  It is easy to talk about “living your truth” and “risking everything to pursue your passion” when you are a multi-billionaire for whom the risks brought great reward.  Do you think the person who just lost everything when his/her business collapsed feels happy and fulfilled because they “followed their dream?”  Doubtful.

Anyway, as I read the quotes from these highly successful ladies, it occurred to me that living in the past can be a dangerous thing.  Sure, it is good to look back and say, “Oh, I really wish I had not done that.”  On the other hand, you can become so paralyzed by fear of making the same mistake that you take no action at all.  The key is to learn from the mistake and get on with your life.

We can do that in our portfolios too.  There was a time when I was reluctant to invest excess cash in my portfolio because of current market conditions.  As a result, I missed out on some of the upticks in the market.  The lesson I learned is emotion has no place in investing. 

You may have similar feelings now with the upcoming election.  What happens if Obama is re-elected?  What would Romney do if he becomes President?  Will this country fall into a Great Depression or have a huge economic boom?  No one knows.  However, I would bet that, if you looked at previous elections, similar comments were said about the president and candidate then.  It happens with every election.  Work the crowd into a frenzy so they will watch the news.

We cannot change the past.  We cannot predict the future.  Let’s focus on what we can control (our behavior), keep calm, and carry on.

Cristy Freeman, AAMS
Senior Operations Associate

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The Fiscal Cliff, Taxes and Investment Decisions

This morning CNBC had a headline “Fending off the Fiscal Cliff”.  I turned off the TV.  You have to beware of headlines that create a sense of urgency to do something in your portfolio.

This sort of reporting promotes what I call the “I’ve got a feeling” trade.  This is when you take some action in your portfolio based on the mood of the day. Currently, there is a lot of focus on the Presidential election.  If you are concerned about the other candidate winning, keep in mind that someone is equally concerned about your candidate winning.  Don’t make investment decisions based on emotion.

Taxes can be a factor, but should not be the sole driver of an investment decision.  Tax planning for this year is particularly difficult due to the uncertainty of future tax rates.  The Bush tax cuts are set to expire on 12/31, which would cause the tax rate on qualified dividends to increase from a current maximum of 15% to as high as 39.6%, depending on your tax bracket.  We likely will not know anything on income tax, estate tax, alternative minimum tax, the possible return of the IRA charitable deduction for those over 70.5, etc. until after the election or even later in December.  It’s also possible that these tax rates could be finalized in the first quarter of 2013 and made retroactive to 12/31.

This year is unusual in that some of the usual rules of thumb about capital gains may not apply.  Typically, people want to delay paying taxes whenever possible.  However, you way want to realize some long-term capital gains in 2012 in order to lock in the 15% tax rate which will likely be higher next year.  In addition, capital gains rates are currently 0% for taxpayers who are in the 10% or 15% tax brackets based on their taxable income.  The 0% tax rate for these people also expires on 12/31/2012.

You may not want to realize capital gains early under certain circumstances.  For example, if you have investments that are highly appreciated and you are advanced in age or in poor health.  Depending on the size of your estate and what happens with estate tax law, the beneficiaries of these assets may receive a step-up in basis for all or a portion of the assets upon the taxpayer’s death.   Therefore, it wouldn’t make sense to sell assets and pay taxes on the gain when a step-up might be available in the near future.

We recommend that you avoid making major decisions or changes to your portfolio based on fears or possibilities that may or may not materialize. While some limited amount of portfolio rebalancing may make sense, you should discuss your particular situation with your Parsec advisor if you have questions.

Disclaimer:  we are not licensed CPAs and do not give tax advice.  We offer some general guidance with respect to the mechanics of tax issues, but we encourage you to consult with your CPA or a qualified tax professional before making any decisions or taking action.

Bill Hansen, CFA

Managing Partner

October 12, 2012

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A Little Contrarianism Can Be a Good Thing

In our most recent quarterly letter, we reiterated our belief that you should allocate 15-25 percent of your equities portfolio to international stocks. Some of our clients still question the logic of this position in light of the ongoing EU crisis. However, let me make a case for contrarianism.

While the pall hanging over Europe has worsened in the last few years, things have not been rosy for a long time. According to June 2, 2012 article published by The Economist (http://www.economist.com/node/21556299 ):

Robert Buckland, an equity strategist at Citigroup, points out that about 44% of pan-European corporate profits are generated outside Europe (British companies earn 52% of their profits outside the continent). Around 24% of European profits come from emerging markets, roughly double the exposure of American companies to the developing world.

This diversification is not a coincidence. European companies have already endured a decade of sluggish growth and have sought out markets elsewhere (for production as well as sales).”

This indicates that worsening conditions in Europe will compel European companies to expand even further into the global economy. And, our dividend yield loving clients have another good reason not to flee European investments. While the average dividend yield for American markets is 2.2%, European markets are yielding 4.1%.

Beyond Europe, emerging markets continue to provide opportunities for investment. Mongolia is enjoying a rapidly expanding economy thanks to a boom in coal and copper mining. The Arab spring has led some analysts to predict major growth in Libya. A return to oil production and distribution is giving Iraq’s economy a much needed shot in the arm. Additionally, economists see much opportunity for growth in Africa, with several countries expected to post growth rates in excess of 7.5%.

I am not suggesting that European markets have hit bottom or that you should put all of your international investment dollars in emerging markets. What I do espouse is that a well diversified portfolio for the long-term investor has some exposure to international equities, even when the headlines indicate otherwise.

Tracy H. Allen, CFP®

Financial Advisor

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Scared Money Don’t Make Money

Recently, I heard the above phrase in a rap song by Pitbull.  I was surprised to hear mention of investment risk/reward in a popular song.  He did not go on to discuss European economic instability or currency valuation.  That would have been truly shocking.

The statement provokes thought, though.  People who are willing to take the most risk have the potential for greater reward – and greater loss.  It is easy to have an asset allocation of 100 percent equities in an up market.  Can you keep that allocation when the market is significantly down?  Will you still sleep at night?

On the other hand, holding money in a money market fund earning near-zero interest is also a risky proposition.  You must find some vehicle in which to invest because you cannot afford to earn nothing for your money.  Inflation continues to rise, even when interest rates are not.  The dollar you stash in a mattress will not be worth the same 10 years from now as it is today.

Finding the right allocation is very tricky.  It requires a great deal of evaluation on your part.  What is your current age?  Do you have enough time to recover from a short-term loss?  What are your investment goals for the next 5, 10, 15 years?  When do you want to retire? 

This is just a sample of some of the questions you should ask yourself.  A thoughtful review of your situation with your investment advisor will help the two of you to determine the best asset allocation.  Being brutally honest with yourself and communicating your goals, thoughts, and concerns with your investment advisor will allow you to work as a team.  The two of you will be able to find the right allocation that can help you sleep a little better at night.

Cristy Freeman, AAMS
Senior Operations Associate

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I’m the Wiz and Nobody Beats Me!

I heard an interesting piece on NPR the other morning while I was driving to work. It was about the power of perception – in this case, how it relates to golf. A researcher at Purdue University did an experiment using an optical illusion to change the appearance of the golf hole. She found that, even when the holes were exactly the same size, participants were more likely to sink the putt when they perceived the hole to be bigger than it actually is. Here is an example (it’s called the Ebbinghaus illusion):


The conclusion is that with positive perception comes confidence. However, confidence alone won’t guarantee top performance, at least not in sports. And not in finance, either – the piece reminded me of something psychologists call overconfidence bias. Basically, people have a tendency to believe their predictions are far more accurate than they actually are. And the interesting thing is, the more a person is considered an “expert” the higher their level of overconfidence. Their increased knowledge of a particular topic leads them to believe they are correct far more often than they actually are. Even better, researchers who have studied this phenomenon find that the worst performers tend to be the most overconfident. And of course, if you were to ask a panel of experts to rank themselves against their peers in terms of their abilities, each would most likely rank himself as above average. The same way everyone is an above average driver, or has a good sense of humor, right? It’s statistically impossible, but there you have it.

So if the experts don’t have good predictive abilities, why do we use analysts’ forecasts at all? Well, you have to start somewhere. Psychologists call this anchoring – the need to grab hold of something in the face of uncertainty. When we review a particular company’s equity, we study a variety of research reports and consensus estimates. Sometimes the predictions vary widely, other times the range is pretty tight. We start with these and run different scenarios, in the belief that the outcome will lie somewhere between the best- and worst-case. We always view the analysts’ estimates with a critical eye and make adjustments for those that seem overly optimistic, in order to predict a more realistic outcome. Of course, this is also why we are strong advocates of a well-diversified portfolio – we know that predictions are only that, and anything can happen. Proper diversification dampens the effect that an unforeseen negative outcome in any one security will have on the portfolio as a whole.

The good news is, you can improve your putting with a little optical illusion. Feel free to take a little cutout of small circles to overlay the hole next time you go. Nobody will think you’re crazy or anything.

Sarah DerGarabedian, CFA

Director of Research

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Is It Priced In?

In our investment process, we often have to ask ourselves this question.  Something bad has happened to a company or market; does the current price reflect the news?

Years ago, when I was an undergraduate finance student, the Efficient Markets Hypothesis (“EMH”) was popular and taught at virtually every university.  The debate wasn’t about whether it applied or not, but rather to what extent.  I have summarized the three “forms” of the EMH below:

Weak Form:  Stock prices reflect all historical information.  This means that past prices give no predictive information as to future prices.  The implication is that technical analysis, such as studying chart patterns, or the “support” and “resistance” levels you hear about in the media, are worthless.

Semi-Strong Form: Stock prices reflect all publicly available information.

Strong Form:  Stock prices reflect all information, whether publicly available or private (i.e. insider).  In a strong form world there would be no such thing as insider trading.  Why? It would not be profitable, since all information has already been reflected in the current stock price.

In my classes, pretty much everyone agreed that the weak form held, and that charts were worthless.  The debate was between semi-strong and strong.  At the time, my personal view was that reality was somewhere in between the two. 

After the last two stock market crashes, many began questioning the EMH and whether it is valid at all.  Today, high frequency traders make millions of trades per day based on computer models driven largely by past data.  If the weak form of the EMH held, there would be no profit in this type of strategy.  Now I believe there is another factor to the EMH:  time.  Markets are reasonably efficient in the long run, however, prices may become disconnected from the underlying value of a company or market for a period of time.

Stock prices adjust almost instantaneously to news.  Markets are forward-looking, meaning price changes really are about changes in future expectations.  Company XYZ reports earnings ahead of consensus expectations, but the stock price falls.  Why is that?  Management may have adjusted future earnings guidance lower or just sounded more pessimistic about the next few quarters in the future.  This causes market participants to adjust their expectations (and the price) downward.   Some companies have grown tired of this short-term focus, and refuse to even give guidance regarding their earnings.

So is it priced in?  The answer is sometimes.  The art is in determining when this is the case and when the consensus is wrong.  We address this by having a disciplined investment process focused on fundamental data, and ignoring short-term noise.  Our focus is on financially strong companies that are likely to have rising earnings and dividends over time.  However, working with our clients to determine an appropriate asset allocation that suits their individual situation and having the discipline to stick to it is even more important to investment success.

Bill Hansen, CFA

Managing Partner

March 30, 2012

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The Asset Allocation for College Funds

Asset allocation, the proportion of stocks, bonds and cash in a portfolio, is one of those topics that financial advisors think about constantly.  Because we have clients with such a variety of needs and changing financial scenarios, we are always working with someone to help them find the appropriate investment allocation for their personal situation.  For the typical investor however, it shouldn’t be so hard.  Once you’ve chosen the appropriate allocation, you should stick with it as long as your financial or life circumstances haven’t changed much.  This type of “set it and forget it” mentality is the mark of a disciplined investor.

But what about the asset allocation for a college fund?  For a newborn child you only have 18 years before you have to pay out a significant portion of the fund, which you will then deplete over 4 years.  If you start saving later, the time frame is even shorter.  This is very different from a retiree who will often have a longer time frame than 18 years.  Also, for a retiree, typically the intention is to spend around 4 to 5% of the retirement portfolio value every year, so that the retirement funds continue to grow over time.  This isn’t the case with a college fund.  It can be both long-term (18 years to grow) and short-term (all paid out over 4 years) at the same time.  It makes the asset allocation decision a conundrum.  Now throw in the fact that somehow children grow up faster than you can possibly imagine and each year the time until payout grows exponentially closer, requiring more frequent allocation tinkering.

If you are able to save when your children are babies, the allocation decision is fairly easy.  With an above-average risk tolerance you might choose 100% equities.  Once kids are in their teens though, you could switch to a more conservative allocation with a mix of stocks and bonds.  As they approach their final year of high school, you could move to all fixed income.  There is no easy solution here, and often it depends on the parents outside resources.  If the parent is entirely dependent upon the college funds to pay for college, the fund should be more conservative as they approach age 18.  The give up is potentially less money for college if the stock market is doing well during these years.

If you have multiple children with 529 plans for each, and outside resources in addition to this, you may choose to stay with a higher equity allocation.  If the stock market doesn’t perform well during the college years, the parent could choose to pay some expenses out of pocket and then roll any excess 529 funds to younger siblings.

Regardless of the allocation you choose, you are taking a risk.  If you’re too conservative you may not have enough money to pay for college.  Conversely, if you’re too aggressive, you stand the chance of losing money you’ve saved all along just at the time that you need to withdraw it.  My advice is to discuss the allocation with your financial advisor.  Your risk tolerance will be the main driver in this decision.  Other important factors will be outside resources for paying for college, as well as your family’s unique circumstances.

Harli L. Palme, CFA, CFP®

Financial Advisor

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